Preventing crash in stock market: The role of economic policy uncertainty during COVID-19

TL;DR

This study examines how economic policy uncertainty influences stock market crash risk during COVID-19, revealing that increased EPU heightens crash risk, especially amid the pandemic.

Contribution

It introduces a GARCH-S model to quantify crash risk and demonstrates the amplified effect of EPU on stock market stability during COVID-19.

Findings

EPU negatively correlates with stock crash risk

The correlation strengthens during COVID-19

Higher EPU increases crash risk during pandemic

Abstract

This paper investigates the impact of economic policy uncertainty (EPU) on the crash risk of US stock market during the COVID-19 pandemic. To this end, we use the GARCH-S (GARCH with skewness) model to estimate daily skewness as a proxy for the stock market crash risk. The empirical results show the significantly negative correlation between EPU and stock market crash risk, indicating the aggravation of EPU increase the crash risk. Moreover, the negative correlation gets stronger after the global COVID-19 outbreak, which shows the crash risk of the US stock market will be more affected by EPU during the pandemic.